Missouri winery sues to halt Iowa sales law

Missouri business is challenging Iowa's wine distribution law as unconstitutional in a fight that in-state wine advocates say could cost them tens of thousands of dollars in annual tax increases and ruin their competitive edge.

"This is substantial," said Ron Mark, owner of Summerset Winery, near Indianola. "We'd probably have to put the business up for sale."

The Missouri vineyards' lawsuit stems from a 2005 U.S. Supreme Court ruling that struck down New York and Michigan laws that regulated out-of-state wine shipment to consumers differently from the regulated in-state wines. The court ruled the laws unconstitutional because they discriminated against interstate commerce.

Iowa lawmakers never moved to change Iowa law after the court's ruling. Under current law, out-of-state operations cannot legally ship their products directly to consumers and must, instead, sell wine through a distributor. That process costs $1.75 a gallon in taxes, which in-state wineries do not pay when they sell their products directly to customers.

The solution to fix the possible unconstitutionality of the Iowa law is tucked inside a fast-moving, 252-page government reorganization bill. Out-of-state wineries would be treated the same as in-state businesses under the bill.

But there's a catch: All wineries would pay the $1.75 per-gallon tax.

That means that businesses like Summerset Winery would have to pay the state more in taxes, which owner Mark estimated at an additional $25,000 a year for his business.

Summerset Winery "isn't like a fat cow," Mark said. "Everybody gets a salary, we pay our taxes and there's not a lot left over."

The lawsuit was filed last week in district court on behalf of OakGlenn Vineyards in Hermann, Mo., and potential customers Michael Liebbe, a Davenport lawyer, and Christopher Lueth, a University of Iowa law student.

For out-of-state wineries, Iowa's law is "a pretty big hindrance," said Glenn Warnebold, an OakGlenn owner who said he doesn't do business with Iowa because of the state's law.

"We have a fair number of customers that come from Iowa," Warnebold said. "To them, it's an inconvenience. To us, it's a loss of revenue."

The solution to treat all wineries equally and charge all the $1.75 per-gallon tax on wine sold directly to customers is part of a set of recommendations from a consultant hired by Gov. Chet Culver to find savings and revenue within state government.

Two Democratic senators who lead the Senate's agriculture committee said Wednesday they were unaware of the possible unconstitutionality of the law until contacted by The Des Moines Register. Furthermore, they also were unaware that a provision in Senate Study Bill 3030 would force in-state wineries to pay more taxes.

"I can tell you, nobody has contacted me from the wine industry at all about that concern," said Sen. Rich Olive, D-Story City, vice chairman of the Senate Agriculture Committee. "I have not received one e-mail or one letter expressing concern."

Iowa vineyards have grown from around 15 in 1999 to more than 325 today. That growth is important to maintain, said Sen. Gene Fraise, D-Fort Madison, chairman of the Agriculture Committee.

Matt Eide, a lobbyist for the Iowa Wine Growers Association, said the group has concerns about the potential effect on the industry and would discuss the issue late Wednesday.

Lynn Walding, division administrator for Iowa Alcoholic Beverages Division, said the tax would apply to all wineries. He estimated that the tax would bring in about $370,000 a year from out-of-state wineries and up to $100,000 from in-state wineries.

Walding's division in 2007 recommended Iowa allow out-of-state wineries to ship directly to customers. The change would allow the state to better track wineries, which would have to license with the state and could be better monitored, he said.

Currently, many out-of-state wineries break the law by shipping products through the mail, Walding said. The violators are rarely prosecuted because county attorneys typically don't have time, he said.

"I think there's a recognition that some have engaged in that practice" of illegally selling in Iowa, Walding said. "What this would do for Iowa is create a regulatory environment where they will have to get a license."

Only New Mexico has laws in place, similar to Iowa's, that treat in-state and out-of-state wineries differently, according to information provided by Walding. A dozen other states had such laws in place when the Supreme Court ruled in 2005 that they were illegal, he said.